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Mandatory Home Energy Audits Stopped!

A backlash from consumers and the real estate industry over a plan to require energy audits every time a home is sold has prompted Energy Minister George Smitherman to back down.

The audits – which raised concerns that information could be used to beat down the price on the seller's home – will no longer be mandatory under amendments to the government's Green Energy Act now working its way through the Legislature.

Buyers can request the seller to get an audit as part of the negotiating process but it will be voluntary, Smitherman said yesterday, urging buyers to go ahead with audits.

"We think it's important to have that information when you buy a home: How much energy does it use?" he told reporters. "We've created an opportunity for buyers to say to the seller, `No, we're not after that information.'"

The Progressive Conservatives applauded the change, one of several amendments to the act, saying the audits would have "tremendously harmed" a housing market already struggling in the recession.

"It's a huge climbdown," said energy critic John Yakabuski, MPP for Renfrew-Nipissing-Pembroke.

"The only people to be sad today are home energy auditors and George Smitherman, who hates to be wrong."

The act, designed to bring more energy conservation efforts and renewable sources of electricity to the province, will also be amended so residents will have an easier time objecting to wind turbine projects near their homes given the health concerns that have been raised.

"We listen carefully," said Smitherman, who earlier suggested the law was written to limit the number of "not-in-my-backyard" objections to turbines. "We've made it easier for people to raise concerns around health and safety," he said.

Critics had complained Smitherman was running roughshod over peoples' legitimate fears about their health and property values.

"For him to dismiss it was typical," said Yakabuski. "He's had to admit there was an issue out there. It's a huge admission."

Bill 150, making home energy audits mandatory for home sellers, unless waived by buyers, has been passed; however, the Bill’s requirements regarding home energy audits are NOT YET IN EFFECT and are not expected to take effect until 2010.

BackgroundAs originally proposed, Bill 150 would have required home sellers to provide information, through standardized energy audits, about the home’s energy efficiency to a buyer before the home could change hands. Following massive public pressure as well as the efforts from TREB and OREA working to raise concerns about this proposal, Bill 150 was amended to allow buyers to waive this requirement.

Next StepsNow that Bill 150 has been passed, the Ministry of Energy and Infrastructure is working on preparing regulations that will outline the details on how the home energy audit requirement will be implemented. The home energy audit requirement will not take effect until these regulations are finalized, expected in 2010.

Ontario’s Energy Minister, George Smitherman, has made amendments to the proposed Bill 150: Green Energy Act. The Bill in its original form would have made it mandatory for homeowners intending on selling or leasing their properties to perform mandatory energy audits prior to accepting an offer.

Information derived from the auditor’s report would then be provided to interested-parties at a cost to the homeowner ranging anywhere from $250-$400, plus taxes. The Bill, as amended by The Standing Committee is now going through its 3rd reading.

The amended version has removed properties-for-lease from the fray, as well; buyers will have the option to waive the audit requirement by providing this intent in writing. (See my views on this bill in an earlier post titled: “Bill 150: mandatory energy audits & its implications.” )

The thrust of my objections stemmed from a number of fronts, among them:

Government imposing another transactional cost on the backs of homeowners in a period of tremendous economic decline seems harsh, insensitive and out of touch with the flogging reality of the times.

Energy audits, like home inspections should remain a voluntary option as neither initiative could be described as an exact science.

The majority of homes in Ontario (61%) are more than 25 years old. Thus a mandatory audit would force nearly to 2.8 million homeowners to conduct audits on homes constructed well before energy conservation, environmental protection and other efficiency principles were ingrained in our modern building code.

If the true intent of the bill is to enhance energy consumption and efficiency in Ontario, why would the government exclude commercial, agricultural, institutional, educational and industrial properties from this requirement?

Ofcourse obtaining useful information on a property’s current energy consumption can prove helpful. However, the same goal can be achieved using other alternatives that do not involve the imposing hand of government.

For instance, when preparing an offer to purchase on behalf of a buyer, if energy consumption is an issue, a clause could be inserted to render the offer conditional upon my client reviewing recent utitlity bills to his or her complete and ”arbitrary” satisfaction.

A second approach could simply include an outright conditional energy audit clause. If a seller reject the inclusion of such a clause without adequate justificiation (such as the presence of a high efficiency furnace, recently re-sealed windows/doors or perhaps a recently constructed home with a variety of green features) then this would ofcourse be cause for concern.

A buyer under the guidance of a competent representative would be advised to continue the search elsewhere. These simple mechanisms are available now without the outstretched hand of the law. In my view, the ammendments to the bill do not go far enough. The province should remove any obligation in its entirety.

The provincial government’s July 2010 plan to harmonize the federal Goods and Services Tax (GST) with the Provincial Sales Tax (PST) will hurt Ontario families financially at a time when every dollar saved matters. A harmonized sales tax (HST) means both the GST and the PST would be combined into a single federally administered tax mechanism with a single rate of 13 percent: the provincial portion being eight per cent and the federal portion, five per cent. My concern lies with the 8% PST component that will be added to many goods and services that are presently exempted from PST.

As a result of the coming changes, Ontarians will now have to pay an additional 8% on the following items: The purchase of a new home above $500,000; hiring a lawyer; real estate marketing fees; home inspections; the pending mandatory home energy audit; home & fire insurance; title insurance; gasoline; diesel; propane; home heating fuel; home electricity; natural gas; home TV service; home internet service; home phone service; cell phone charges; train fares; plane fares; taxi fares; bus fares; dry-cleaning; grass cutting; snow removal; firewood; labour on home renovations and myriad of other items not listed here. While still subject to the 5% GST component of the Harmonized Sales Tax, a few items will be exempted from the additional 8% burden. These include: Resale homes (GST excluded), books, children’s clothing and footwear, children’s car seats and car booster seats, diapers, and feminine hygiene products.

What picture do the numbers paint? On new homes priced at $400,000 or below, an exemption will keep the PST component to approximately 2 per cent. However, the exemption is scaled back on homes priced above that mark. A buyer of a $400,000 home will shell out at least $8,000 in HST, while the purchaser of a newly built $500,000.00 home will pay a whopping $40,000.00 in taxes-the full 8%! Let’s not forget to also include the remaining 5% GST component which brings the new total sales tax burden to roughly $65,000. This does not bode well for many first time buyers wanting to pursue the dream of owning a brand new home. “In one fell swoop, the HST undermines the federal goods and services tax (GST) cuts, the increase in the RRSP Home Buyers’ Plan limits, the first-time buyers’ tax credit and the home renovation tax credit, totally offsetting any stimulus effect from these initiatives” says Stephen Dupuis, president and CEO of the Building Industry and Land Development Association.

Consumers are not the only ones to feel the heat. The housing industry is a vital economic engine in the province of Ontario; in 2007 it produced an estimated 325,000 jobs directly or indirectly according to Statistics Canada. Today, it’s seen the highest job loss casualties as a result of the economic downturn. James McKellar, director of the Real Property Development Program at the Schulich School of Business at York University says: “The unintended short-term consequence is the likely delay or even cancellation of some “shovel-ready” housing projects that are in the pre-sale stage. This does not bode well for labour markets… Why is government intent on spending taxpayer money to create infrastructure jobs and bail out the auto industry, all in the name of job creation, and at the same time charting a course to bring much of the housing industry to its knees?”

Although purchasers of resale homes will be exempt from the new HST, many services commonly associated with resale transactions will still face the additional tax burden. As mentioned earlier an additional 8% tax will have to be paid on: legal fees, insurance premiums, moving fees, real estate fees, home inspection fees, home renovation labour and a gamut of other possibilities. To get a complete picture of the weight of taxation on the housing industry, we must also include other government fees imposed on purchase/sale transactions such as: land dedications, building permit fees, applications and processing fees, home warranty fees, land transfer and registry fees, provincial land transfer taxes, municipal land transfer taxes (in the case of Toronto only)-which all constitute a form of indirect taxation on buyers and sellers within the housing dynamic.

While there are key benefits associated with harmonizing the PST with the GST, such as improved tax reporting efficiencies for businesses, this is not the right time to shift the burden onto the backs of families in Ontario. Other tax reduction approaches for business should be brought into the fore. Treating real property like any blanket consumption good is a mistake. The current 8% approach should be modified to perhaps 2% , taking into account the unique nature of housing. Unlike many other items affected by the HST, housing continues to bring a stream of revenues (property taxes, taxation on utility charges etc) into government coffers long after the initial purchase, on average up to 75 years.

Controversy surrounds Ontario Energy Minister George Smitherman’s recent introduction of Bill 150, the Green Energy and Green Economy Act 2009. In a nutshell, prior to selling, a homeowner would be required by law to pay for an energy audit that reports on the “energy consumption and efficiency” of their home.Most residential properties in the province would fall under this requirement including: owners of low-rise residential properties, single detached and attached homes (e.g. row housing, duplexes and triplexes), small multi-unit residential buildings including some small apartment buildings of three storeys; mobile homes on a permanent foundation and floating homes permanently moored. Condo owners are currently exempt under the current proposed bill.

Lets examine some of the implications of Bill 150. Is this a good thing for buyers? First, according to real estate lawyer Bob Aaron ” …I find it strange that the government wants to impose energy audits, but not mandatory inspections of house components, which can be matters of life and death, such as propane storage tanks, carbon monoxide leaks from furnaces, significant non-compliance with building codes, or dangerous electrical panels. Frankly, it makes me question the government’s motives in all this. At present, energy audits are optional and I have yet to have a client perform one on his or her house purchase…”

According to the Ontario Real Estate Association: Home energy auditing is far from an exact science. Like home inspectors, different firms will arrive at different energy ratings. An investigative report prepared by the Toronto Star on home energy audits, received three different lists of recommended retrofit renovations, ranging from $5,000 – $25,000 on the same home. Similarly, home energy audits rely on the skill of the auditor to ensure that the finished report is an accurate description of the energy efficiency of the home. With a significant portion of the audit based on a “visual inspection” of the home, the accuracy of the final audit report is largely based on the standard of training administered to the auditor.

The majority of homes owned in the province of Ontario are over 25 years old. According to the Canada Mortgage and Housing Corporation (CMHC), 61% of Ontario’s occupied dwellings were built before 1980, with 15% overall built before 1945.. Mandatory energy audits would force 2,785,425 Ontario home owners to conduct audits on properties that were constructed well before energy conservation, environmental protection and other efficiency principles were ingrained in our modern building code. As a result, owners of older homes will be at a disadvantage as buyers look for newer, more energy efficient homes.

Residential home owners stand to bear the brunt of yet another government imposed transactional cost. At present, voluntary energy audits range from $250 to $400, plus taxes. If Bill 150 becomes law, there is no guarantee that costs will remain in that range. At current, an estimated 453 federally licensed energy auditors are employed across the province of Ontario. Demand for their services would sore significantly, outstripping the current supply and creating a backlog which in turn would drive up fees, and negatively affect the efficiency of the selling process. Moreover, the potential narrow time frame available to train and license these quasi-technicians (currently the job of Natural Resources Canada) would raise serious ethical concerns about overall quality standards and competencies.

In a period of declining home equity values, declining stock market wealth, declining commodity markets, higher unemployment rates, higher personal bankruptcies, hunkered in by a global recession the likes of which many of us alive today have never seen, imposing an additional compulsory cost on the back of homeowners is, to say the least, baffling! It’s worth noting that the provincial government seems convinced energy consumption is the domain of residential property owners alone. Note the exemptions from this proposed law: commercial, agricultural, institutional, educational and industrial properties. Why not impose this across the entire real estate gamut if indeed the goal is to promote a platform of efficient energy use?

Lawyer, Bob Aaron, quoted earlier, also describes: “…the scary inspection powers contained in Bill 150. It says that the deputy minister may designate anyone to be an inspector under the legislation. At any reasonable time, an inspector may, without a search warrant, enter any place where he or she believes that there are documents relating to an offer to sell or to lease a residence. This would include a lawyer’s office, a real estate office, and – with a search warrant – even a private home. The inspector has the right to demand to see any documents that are relevant to the home energy audit and take them away for the purpose of making copies. The inspector may also require any person to assist with an inspection. A contravention of the act, including a failure to co-operate with a search, is punishable by a penalty of up to $10,000. Corporations can be fined up to $25,000.”

Other concerns voiced by OREA:

(1) Mandatory home energy audits will adversely affect first time home buyers. The majority of homes that will not score well on home energy audits are resale homes. Resale homes, on average, are more affordable for first time home buyers. If homeowners decide that energy retrofits are necessary in order to sell their home, how will first time home buyers, who statistically have smaller than average down payments, be able to pay the increased sale price?Seniors will also be disadvantaged by mandatory home energy audits. Most Ontario seniors rely on the equity they have built in their homes for retirement. Mandatory home energy audits will force homeowners who are seniors to complete energy retrofits at a tremendous cost to their retirement savings or lower the value of their home in order to compete with newer ones.

(2) How long are audits good for? How long will home energy audits be recognized as providing an accurate description of the energy efficiency of a home? For example, if a consumer buys a residential property with an energy audit completed by the seller, will they be required to have another audit completed if they sell the property six months later? If not, then how long are energy audits good for? One answer might be that the accuracy of an energy audit depends on the property itself and not on a uniform standard.

(3) Are new homeowners eligible to use old audits? Currently, homeowners are only eligible for one energy audit rebate per property. According to Service Ontario, once ownership of the property changes hands, the new owner must complete another energy audit in order to take advantage of any corresponding retrofit rebates. Even if the audit completed by the original owner is only one month was completed just prior to the sale of the home and now major renovations had taken place, a new owner under the existing program would be forced to complete another audit.

(4.) There is concern that once home energy audits become mandatory, insurance companies will demand to see the results prior to offering insurance on the property. This could result in higher insurance premiums for homeowners whose residence receives a low energy audit rating making the net carrying cost of home ownership more expensive.

In my mind, the credible alternatives are quite clear. First, provide a mechanism of expanded tax breaks to encourage better energy efficiency use by homeowners. In this period of tragic economic decline, additional spending and further government scrutiny in the market place is not welcome. Second, closely linked to the first, allow the market to decide the relevance of an energy adviser in the buying and selling process. We have witness the proliferation of home inspections as a concrete example of a voluntary system of home evaluation that has gained the market’s acceptance without intervention by government. In the words of Richard Bach, “the simplest things are often the truest.”

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